Monday, 27 February 2017

The International Non-Profit Credit Rating Agency: An Attempt to Inject Some Responsibility

This short post is concerned with
the attempt by a non-profit organisation to inject some much needed
responsibility and care into the credit rating industry. Based on a published
article that is available here
in its final form in The Company Lawyer,
and here
in its pre-published and different form, this post will look at the
International Non-Profit Credit Rating Agency (hereafter INCRA) and its aims,
as well as some of its shortfalls. Ultimately, it is concluded that whilst the
endeavour is incredibly worthy and should be praised, the environment is skewed
against newcomers to the rating marketplace, and especially those trying to
reduce the impact of the venal 'Big Two' – Moody’s, and Standard & Poor’s.

INCRA was initially developed by
the Bertelsmann Foundation in 2011, organically
as a result of its research into the quality of nation states’ quality of
governance via its Transformation
Index. As such, the newly-imagined
rating agency set its sights on analysing the creditworthiness of sovereign
states, but by different methods to those utilised by the established rating
agencies. We have already seen in Financial
Regulation Matters that the issue of creditworthiness in the sovereign debt
market is of pressing concern, with yesterday’s
post discussing the potential disaster that may be looming if one of the constituent
‘dominoes’ falls i.e. Greece, Spain, or any other E.U. country that is
financially on the brink. The fundamental call of INCRA is that a more
comprehensive set of indicators and tools for research are required, so that
the long-term socioeconomic and political aspects are further embedded into the
rating process, far more than they are now. This difference is repeated
throughout the fabric of the agency, particularly in terms of how it hopes to
be financed; rather than submitting to the conflict-of-interest that is at the
heart of the current failings of the ratings industry – the
issuer-pays conflict – INCRA aims to be funded by a number of concerned but
ultimately independent bodies, like the IMF and the G20.

More detail can be found on INCRA
in the article and online. The issues facing the prospective agency however are
great. The issue of funding is a major hurdle, because the prospective $400
million required is a) unlikely to be garnered from nation states who have
their aims to influence the process, as will be discussed in a future post
based upon a recently published article by this author, available in a
pre-published and different form here and in its final form here,
and b) the prevalence of the Big Three rating agencies mean that supplying an
alternative is not likely to succeed. The article goes onto to suggest that the
agency needs to merge with another endeavour that is concerned with rating in
the correct way, the Credit Research Initiative,
and that they should take advantage of a gap in the regulations so that the
imagined merger would serve as a ‘check’ on the actions of the Big
Three, free from any perceived conflicts of interest.

Ultimately, the issue is clear to
see – the Big Two rating agencies in particular are engrained into the fabric
of the economy. According to a work in progress by this author, available here,
the credit rating agencies have been jostling for position throughout their
history and the current era represents their most successful yet. As such,
worthwhile and humanistic-based endeavours rarely get off the ground because of
the might and the interwoven nature of the established order. However, rather
than be disheartened, it is important that such endeavours are supported,
amended as appropriate to meet the task ahead of them, and are ultimately put
in a position to question the established order and provide clear-cut evidence
of its failures – clear-cut evidence of its failures was abundant after the
Financial Crisis, but unfortunately time washed away the disdain that should be
directed towards the agencies; these endeavours can help return the spotlight to
these agencies that were, and may be
again at the heart of a financial crisis.

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